Chairman of V-Capital: China’s Equity Pledge Crisis Offers Opportunities for Acquisition of Listed Companies

Chairman of V-Capital: China’s Equity Pledge Crisis Offers Opportunities for Acquisition of Listed Companies

Source: Bloomberg Terminal

By Li Yali

2018-08-26 23:33:59.143 GMT

Bloomberg News Reports

 [Bloomberg]—Tang Weiqing, Chairman of the PE firm V-Capital, stated that the current equity pledge crisis in China offers opportunities for acquiring quality listed companies, and that V-Capital is considering acquisitions in such industries as semiconductor and pharmaceuticals. Meanwhile, although deleveraging restrains the acquisition capabilities of Chinese enterprises in domestic and overseas markets, the trade war may motivate them to increase international presence with more mergers and acquisitions (M&A) overseas.

* In the telephone interview on August 23rd, Tang Weiqing noted that as deleveraging pushes forward and economy shrinks, the pledges of shareholders in listed companies are squeezed by money flows. As a result, the biggest or major shareholders need other funds to continue the business operation, hence great opportunities for the M&A of quality listed companies.

* Currently, the Chinese stock market shows no sign of hitting the bottom. The equity pledge crisis is caused mainly by two factors:

** Shareholders’ pledge funds are invested in long-term projects, mismatching with the financing maturity of one to three years; or even if the terms of the invested projects match the maturity, the shareholders are unable to get the money back at the point or the returns on investment fail to live up to expectations

** The stocks of many companies with small- and medium-sized market values drop significantly. Shareholders are under the pressure of increasing their pledges, or a margin call will be triggered.

* V-Capital will seek M&A targets with sound industrial development, healthy core businesses, considerable revenue and profit gains, and low debt ratios in industries such as semiconductor, pharmaceuticals and high-end manufacturing.

* Note: V-Capital, which manages assets of more than 10 billion RMB, is a subsidiary of Huaxi Holding. It once participated in the pre-IPO financing of Contemporary Amperex Technology.

* Note: The report of Sinolink Securities on August 21st suggested that, as of August 17th, a total of 3,462 companies have not terminated their equity pledge, accounting for 95 percent of A-share listed companies.


Trade War May Increase Overseas M&A of Chinese Enterprises

* The deleveraging in China is a greater concern which may influence the capabilities of Chinese enterprises to acquire businesses home and abroad, as the tightened liquidity can restrict companies’ M&A capabilities.

* The China-US trade war may motivate Chinese enterprises to gain their international presence, shift their production capacity abroad, and acquire relevant enterprises, so as to evade the risks associated with the trade war with developed countries. Certainly, the trade war also undermines Chinese enterprises’ purchasing power.

* However, V-Capital has taken no account of large-scale M&A in the US since last year, because acquisitions of high-tech targets are restricted by the US authorities.

* Note: The Huaxi Holding Report for Q1 2018 shows that V-Capital and its partners have acquired controlling stake in the Italian pharmaceutical company Nerviano Medical Sciences Group.


Capital Flow Problems of Private Enterprises Remain to be Solved

* Private enterprises, instead of state-owned enterprises, suffer the most from this round of deleveraging.

* The policymakers have expressed their wish that financial institutions can provide more support for private enterprises, but the initiative is purely linguistic. At present, there is still no concrete measure to address lending risks of financial institutions and capital flow problems of private enterprises.

* The possible concrete measures include: banks ease restrictions on loans issued to private enterprises with normal operations in a targeted manner; banks and insurance companies are encouraged to buy bonds issued by private enterprises; and state-owned guarantors can offer credit guarantees for debt issuance of private companies with satisfactory operations.


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